Why You Should Consider an Immediate Annuity

An immediate annuity is a contract between an individual and an insurance company in which the individual, or owner, makes a single, lump-sum payment and the insurance company agrees to make periodic income payments back to an annuitant over a period of time. As implied by the name, immediate annuities begin making payments almost immediately — payments can be initiated in as little as 30 days (or as much as 12 months) from the date of purchase. These payments can last for a defined period of time or for the remainder of one or two annuitants’ lifetimes.

There is no accumulation phase, so there is no IRS-imposed penalty on interest earnings even if the owner is under age 59 ½ when income distributions start. Further, these types of annuities come with a number of guarantees: fixed interest rates, and payment amount, frequency, and duration. These annuities are predictable and can enhance one’s retirement by providing a stable source of income after a retiree stops receiving a regular paycheck. Further, they often offer higher interest rates on average than savings accounts or Certificates of Deposit, so owners may have a better chance of staying ahead of inflation by purchasing an immediate annuity compared to a product offered by a bank.

Advantages to Immediate Annuities

Flexibility in payments: There are usually four payment options for immediate annuities:

• Fixed period: You receive payments for a specified length of time.

• Fixed amount: You receive payments of a specified amount for at least as long as the annuity guarantees those payments.

• Life income: You receive payments for the remainder of your life.

  • If you elect this payout option with a “period certain,” you will receive payments for life, and you will also elect a period of time (called the period certain) during which, if you were to pass away before its expiration, payments would continue to be made to your designated beneficiary for the remainder of that period.

• Joint and survivor income: You and a joint annuitant receive payments until one of you passes away. Thereafter, the survivor receives a percentage of the original payment amount until their death. Note that the percentage the survivor continues to receive will impact the amount of income the contract guarantees while you are both living.

Depending on your needs, you could use an immediate annuity with a fixed period payment to bridge a gap in income, for example, the years between your retirement and when you plan to initiate Social Security income payments. Alternatively, if you want predictable income for the remainder of your life, similar to a pension or military retirement income, you could initiate a life income stream of payments. If you wanted to ensure that your spouse would continue to receive income, you could consider the joint and survivor income option. An immediate annuity has payout options that can be tailored to fit your specific needs.

Immediacy of payments: Unlike a deferred annuity, which has an accumulation period during which no income payments are made, or a retirement account, for which you have to wait until age 59 ½ to take withdrawals to avoid a penalty, immediate annuities begin making income payments within one month to one year after purchase. This means that guaranteed income is regularly available and can be relied upon regardless of what happens in the economy.

No ongoing management: When you purchase an immediate annuity, you make one lump-sum payment at the time of purchase and no payments thereafter. There aren’t ongoing maintenance fees or other contributions to be made, so there is no maintenance required from the owner’s end. The payments will be deposited into a bank account of the owner’s choice on the schedule selected at the time of purchase (monthly, quarterly, semi-annually, or annually), and no more effort is required.

Security during a fluctuating market: Immediate annuities provide safety from an income perspective — once the contract is signed, you know that your income payments will always come in. Further, these payments do not change regardless of what happens in the economy or stock market. In this respect, immediate annuity payouts are similar to a pension or Social Security, rather than funds contained within a retirement account or investment portfolio, which often fluctuate with market volatility. This makes immediate annuities a particularly good addition to a retiree’s portfolio — as their needs for stable sources of income increase as they get older and there is less time for other investments to recover from market downturns.

Immediate annuities may also have tax advantages. At Navy Mutual, annuities are purchased with after-tax dollars, meaning that only the portion of your income made up of interest earned on your original lump-sum payment is taxable. The interest rate you receive is based upon the size of your initial payment and the length of time for which you will receive payments (or your life expectancy if you choose a life income payment option). Regardless of the payout option you choose, this spreads out any taxes due over the life of the annuity, helping you avoid a large tax bill in any given year.